Section 5949’s Semiconductor Ban is a Major Roadblock for U.S. Government Contracts
Section 5949 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2023 (opens in a new tab) represents one of the most comprehensive supply chain restrictions applied to U.S. government contracts. This section prohibits the government from directly buying or using semiconductors—which are necessary to power everything from computers to cars—from certain Chinese companies (and potentially other yet-to-be-named companies in the future). Moreover, Section 5949 prohibits the U.S. government from indirectly buying any product or service that uses these semiconductors.
While Section 5949 was intended to address real security threats to U.S. supply chain security, it does so in a manner that risks cutting off or at least severely limiting the U.S. government’s access to the innovative commercial technologies needed to deliver services to Americans.
In establishing such a comprehensive ban in a relatively short timeframe (the prohibition goes into effect in December 2027), Section 5949 seemingly disregards the fact that U.S.-based alternatives for many of the covered semiconductors do not exist in the capacity needed to meet the government’s needs, and likely will not exist for a long time. While the past few years have brought about historical investments in U.S. semiconductor capacity (e.g., the CHIPS and Science Act of 2022 (opens in a new tab)), the U.S. government will not realize the tangible benefits of these investments at scale for years to come. Building semiconductor manufacturing facilities takes both incredible resources and time (opens in a new tab), and developing and training the skilled workforce needed to support U.S.-based semiconductor manufacturing is proving to be an equally daunting task (opens in a new tab). Further, the diversified nature of semiconductor manufacturing means that the new factories enabled by the CHIPS Act may not even produce replacements for the products restricted by Section 5949.
Notably, the Federal Acquisition Regulatory Council (FAR Council) has an opportunity to mitigate some of Section 5949’s challenges when developing the actual regulations and clauses that will implement this provision in government contracts. This week, ITI filed comments (opens in a new tab) on the FAR Council’s Advanced Notice of Proposed Rulemaking (ANPRM) (opens in a new tab) that would translate Section 5949’s semiconductor ban into actionable, legally binding requirements for federal contractors. ITI’s comments (opens in a new tab) urged the FAR Council to clarify key definitions and requirements for prime contractors, consider the impact on downstream suppliers, and closely coordinate with the Federal Acquisition Security Council (FASC)—the agency responsible for providing government purchasers with actionable guidance for addressing real supply chain threats—to ensure a risk-based approach.
Unfortunately, the FAR Council is facing merely the latest in a long line of uphill battles. For example, it has been almost six years since the enactment of Section 889 of the FY 2019 NDAA (opens in a new tab)—a provision prohibiting government procurement of certain telecommunications equipment. Regulators have yet to release a final rule fully implementing Section 889’s requirements in federal contracts, and DoD continues to ask for waivers (opens in a new tab) due to the supply chain challenges of its global operations. Given that the scope of Section 5949 exceeds that of Section 889, it is unlikely that the FAR Council will successfully implement Section 5949’s comprehensive semiconductor ban with any expediency.
Further, the U.S. Supreme Court’s recent landmark decision in Loper Bright Enterprises v. Raimondo, Secretary of Commerce (opens in a new tab), which overturned the longstanding “Chevron doctrine,” may ultimately limit the FAR Council’s ability to exercise discretion in interpreting Section 5949 and developing implementing regulations.
Now more than ever, it is critically important for the FAR Council to collaborate with the technology industry to understand the range of defensible and commercially feasible options to implement this provision. Getting this “right” is critical for ensuring the U.S. government maintains access to the cutting-edge technologies that enable delivery of best-in-class citizen services for Americans.
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